September 5, 2012

www.millersmoneyforlife.com

How the Worst Drought Ever Seen in This Neck of the Woods Is Going to Affect the World

My wife and I caught a firsthand glimpse of drought-devastated farm country when we drove from Gary, IN, straight south to Evansville, IN this summer.

We saw thousands of acres of devastated crops – entire fields of corn stalks wilting in the dry heat. I asked my wife Jo (a former farm girl) how bad crop loss has to get before it's cheaper to just plow a field under than harvest what's left. She didn't know, but the question kept nagging me.

Crop devastation in Posey County, Indiana

During our drive we pulled in for gas and lunch near Terre Haute, IN, and found a panel of experts sitting at the table next to us: three large men in bib overalls, with large arms and fat fingers, wearing hats that said "John Deere," "Farm Bureau," and "International Harvester." A ha! What better place to start my research?

I told them we were amazed at the crop damage. My wife still owns part of a farm farther south that's been in her family for over a century, and as a kid I spent some time on my grandparents' farm, but to these men we looked like city slickers, and they wanted to check our credibility.

"John Deere Hat" & Friends: An Interview at an Indiana Diner

John Deere Hat: Where's your wife's farm?

Dennis: She's from Posey County, but the farm is across the river in White County.

Internat'l Harvester Hat: You think it's bad here – wait until you get down there. Where was your farm?

Dennis: Fairview, Ohio, but things were different then. Our "tractors" were named Bob and Queen, and I had to clean out their stalls and leave fresh hay waiting for them at the end of the day. I've never seen such crop devastation. Have you seen this before?

John Deere Hat: I've lived in this county for 70 years, and I've never seen such a drought in our neck of the woods.

Dennis: In a good year, what kind of crop yield would you expect?

John Deere Hat: 150 bushels per acre is a good number.

Dennis: At what point, even if some corn is grown, do you decide to plow it under as opposed to bringing out the combine?

Farm Bureau Hat: Depends on the farmer. If he's a sharecropper, he only gets half anyway, as opposed to the farmer who owns the entire crop. It gets to be cheaper to plow down around 40 bushels per acre.

Dennis: There are some fields that seem to have survived, but the yields must be really reduced. What sort of yield do you expect this year?

John Deere Hat: We're lucky to get maybe 50 bushels per acre. We're on the verge of plowing under right now.

Dennis: Some of the cornfields I saw had been cut about halfway up, like the field had been mowed. What's that all about?

Farm Bureau Hat: Insurance adjuster has been out, claim filed, and then they topped the corn. About a mile down the road there's a 6,000-acre field, and the farmer and insurance adjuster walked the entire field – over a mile and a half – and the insurance adjuster wrote off the entire field as a total loss.

Dennis: Last time I looked, corn was over $8.00 per bushel. Has the market priced the recent devastation into the price yet?

John Deere Hat: No. When we harvest what we can, some will go to market, some will go to the bin, and the price will go higher.

Dennis: What the heck is this going to do to the price of ethanol?

[It took about three minutes for them to calm down, and I never got an answer. I did, however, get quite an education on what a stupid idea ethanol is, and how all the plants would lose money if it weren't for government subsidies.]

Dennis: Where is this really going to hurt?

Internat'l Harvester Hat: Many cattle farmers are already selling off their herds because they can't afford the feed. Same thing goes for chicken farmers. Consumers are going to see their food prices skyrocket.

What's a Bushel Worth?

My expert panel also mentioned that there was a multiyear drought in the 1920s. Who knows what next year will bring?

After we drove off, my wife at the wheel, I got out my calculator and did some math. 6,000 acres times 150 bushels per acre equals 900,000 bushels of corn. Using $8.00 per bushel, in a good year that field would yield $7,200,000. That can't be right – probably one too many zeroes. I checked it again and got the same answer. We realized we were looking at hundreds of millions of dollars in crop losses.

Vedran has taught me that a good researcher validates his information from more than one source. Our cousin Ken, who doubles as our farm manager, confirmed the information was accurate "in our neck of the woods" as well.

You Might Not Be a Farmer, But You Probably Eat Bread

How will this all affect you? Vedran Vuk's graph, from the inaugural issue of Miller's Money for Life, shows the price changes for coffee, milk, eggs, and bread since 2006.

The price of corn certainly affects the price of milk, eggs, and bread – either as a product ingredient or as feed for cattle and chickens. Add a significant crop shortage to inflation, and just how high and fast will prices go up?

Every time a saber rattles in the Middle East, the price at the gas pump jumps the next day. Oil companies are not shy about quickly raising prices and using increased costs as their justification. But when the price of oil drops, the prices at the pump seem to drop at a snail's pace.

I suspect major food producers will price their products to stay ahead of the price increase. Competition is supposed to keep prices down, but when one gas station goes up a nickel, within an hour they all do. My unscientific guess is that the same thing will happen with food prices.

After a quick look in my daughter's pantry, I realized the price of every item on every shelf – from Appian Way to Zagnuts – is going to escalate. Even if corn or a corn derivative is not in the product, there's still the ethanol-blend fuel to harvest the product and bring it to market.

Whatever the price jump turns out to be, the entire world will feel the effects.

Depending on how long the drought lasts, farm-irrigation companies may even find themselves in a boom. Farmers "in our neck of the woods" can insure their crops for about 60% of a good year, so billions will be paid out in insurance claims this year – and crop-insurance premiums will surely increase for next year.

Knee High By the Fourth of July?

My grandsons, seven-year-old Braidyn and three-year-old Brock, helped me with my research. By late August, the corn should dwarf my six feet, but instead it's about the height of a seven-year-old. This field was a total loss.

Dennis with his grandsons.

The next photo is the most dramatic of all. The signs along the road are test plots for seed, and by midsummer the corn should be towering over them. With a drought like this, even the best seeds in the world failed the test.

Seed test plots.

My research may lack a technical perspective, but it's important to hear from the guys in the trenches. Ed Steer shared a Reuters article last Saturday in Gold & Silver Daily reporting that the World Bank had announced a 25 percent rise in the prices of both corn and wheat from June to July.

Sounds like my research panel knows a thing or two.

Politicians Have a Money Tree, and Taxpayers Supply the Fruit

When something good happens, politicians in power are quick to take credit. When something goes wrong, they blame something or someone else. And politicians out of power promise they'll fix a problem if you'll only vote for them; like Mighty Mouse they'll come and save the day. Their "solution" is usually spending massive amounts of taxpayer dollars.

With all government "solutions," taxpayers bear the burden.

On the Lighter Side

T

You can never read too much about corn and inflation. Jeff Clark, senior precious metals analyst at Casey Research, published an article on Tuesday, What to Do When – Not If – Inflation Gets Out of Hand, where he made some timely remarks on inflation, corn, and the price of gold.

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Labor Day has come and gone. The stream of vehicles towing boats from the northern lakes back to the Chicago area for winter hibernation is one of the first signs of the changing seasons.

We'll be buttoning things up here the last week in September, and heading south to Florida along with the geese.

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And finally, my daughter Dawn saw fit to send me "senior texting code." Here are two of my favorites:

ROFLACGU: Rolling on the floor laughing and can't get up.

IMHO: Is my hearing aid on?

Until next week…

Dennis Miller
Editor